Despite the popular notion that interest rate hikes have a bearish impact on gold prices, spot gold headed for the biggest gain in three weeks after the rate hike. Gold prices moved up 0.58% to $1,255.90 an ounce on Dec 14. This was because the market had already factored in the possibility of a rate hike given the upbeat economic data. Gold prices trended upward interpreting the Fed’s statement as dovish considering that it is planning only three rate hikes in 2018 and not four.
As widely anticipated, the Federal Reserve raised the benchmark interest rate by a quarter percentage point for the third time this year, pushing the target range to 1.25-1.5%, following a 7-2 vote. The Fed eyes three more hikes in 2018 and two in 2019, acknowledging the fact that inflation continues to its fall behind its 2% target. The inflation forecast for 2018 got a modest bump, from 1.6% to 1.7%. The Fed's preferred gauge showed an annualized growth of 1.6% in the latest reading.
The committee strengthened some of the wording regarding the economy in its post-meeting statement. The Fed stated that “economic activity will expand at a moderate pace and labor market conditions will remain strong”. The Fed now envisions economy to grow at a rate of 2.5% in both 2017 and 2018, up from previous forecast of 2.4% and 2.1%, respectively, in September. In another move that could tighten monetary conditions, the Fed confirmed that it would step up the monthly pace of shrinking balance sheet, as scheduled, to $20 billion from $10 billion beginning in January.
Gold’s Run So Far in 2017
So far this year, despite the prospects of the Fed hiking rates looming large and favorable equity markets, gold has managed to notch a gain of 9%. Particularly, the yellow metal’s prices were buoyed by its safe haven appeal this year owing to geopolitical tensions. Further, frequent terrorist attacks in UK and escalating tensions between the United States and North Korea fueled the price rise this year. In fact, the precious metal broke the threshold limit of $1,300 an ounce this year triggered by the United States-North Korea imbroglio.
Gold Industry Performance, Positioning
The Gold Mining industry has gained 3.7% compared with the S&P 500’s gain of 18.9%, year to date.
Going by the EV/EBITDA multiple (a preferred valuation metric for mining companies that have high capital expenditures), the gold mining industry has a trailing 12-month EV/EBITDA multiple of 7.02, much lower than the S&P 500’s EV/EBITDA multiple of 11.74. The industry’s lower-than-market positioning calls for some more improvement in the near term.
The Zacks Industry Rank relies on the same estimate revisions methodology that drives the Zacks Rank for stocks. The way to look at the complete list of industries is that, we put our X industries (all 265 of them) into two groups: the top half (i.e., industries with the best average Zacks Rank) and the bottom half (the industries with the worst average Zacks Rank).
In the last 10 years, using a one week rebalance, the top half beat the bottom half by a factor of more than 2 to 1. Click here to know more: About Zacks Industry Rank
Within the Zacks Industry classification, the gold mining industry is grouped under the Basic Materials sector (one of 16 Zacks sectors). The gold mining industry currently occupies a space in the top half of the Zacks classified industries with a Rank of #113.
What’s in the Cards in 2018?
Per the World Gold Council CEO, Aram Shishmanian, there are plenty of reasons to be optimistic about gold’s performance, entering 2018. He noted “U.S interest rates may be rising but a lot is priced into the curve already and the direction of the dollar remains uncertain. Meanwhile, the long bull market in equities raises serious questions about prospects for stock prices.”
A number of new mines are projected to enter production in the fourth quarter of 2017, which might support mine production till 2018. Noteworthy mines include The Natalka project in Russia, Canada’s Rainy River project and Houndé in Burkino Faso.
On the demand side, major markets, India and its neighbor China will continue to be growth drivers. Though this year, the Indian market had suffered a setback due to the impact of imposition of Good and Service Tax (“GST”) and anti-money laundering legislation (“AML”) around jewelry retail transactions, we expect it to bounce back as the market adapts to GST. Also, pent-up demand and removal from the scope of PMLA legislation as well as festive buying are anticipated to boost demand for jewelry in the country. Even though the impact of uneven monsoon rainfall distribution on rural population remains a concern, measures taken by the government to deal with the scenario might be a savior.
It is believed that the government measures like mandatory hallmarking next year, will be a positive move for the industry, could impact the trade in 2018. Given the insatiable appetite for gold and the rising wealth of Indian consumers, demand is projected to remain strong in the long run.
Notably, in the third quarter of 2017, China witnessed a boost of 13% in festive buying after 10 consecutive quarters of decline. Retail demand remains high around the Chinese New Year. China is likely to experience solid demand in the future. This is because the people consider gold as a natural medium for savings and diversification in the form of bars, coins or jewelry.
Further, the United States continues to be a strong market driven by economic growth, improving employment levels and growth in consumer confidence. Elsewhere, Germany’s economy is expected to maintain momentum and unemployment is anticipated to continue falling, providing support for the world’s third-largest bar and coin market. Demands from central banks also remain strong with Turkish and Russian central banks adding to their gold reserves. Further, gold is witnessing increased demand in technology, bolstered by demand for high-end smartphones after years of declines.
Stocks Set to Shine in 2018
Investors interested in this space can consider the following gold stocks that have a Zacks Rank of #1 (Strong Buy) or 2 (Buy) with price movement ahead of the industry. You can see the complete list of today’s Zacks #1 Rank stocks here.
Sandstorm Gold Ltd. SAND is a resource-based company, focusing on acquiring gold and other metal purchase agreements as well as royalties from companies that have advanced stage development projects or operating mines. The stock carries a Zacks Rank #2.
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For 2017, the Zacks Consensus Estimate has moved up 25% in the past 60 days and for 2018, the same has gone up 40%. The company has an average positive earnings surprise of 33.33% in the last four quarters. Year to date, the stock has clocked a gain of 21.6%, surpassing the industry’s rise of 3.9%.
Newmont Mining Corporation NEM primarily acquires, develops, explores for, and produces gold. The stock sports a Zacks Rank #1. For 2017, the Zacks Consensus Estimate has undergone a positive revision of 15% in the past 60 days and for 2018 the estimate has moved up 14%. The company has an average positive earnings surprise of 17.63% in the trailing four quarters. Year to date, the stock has clocked a gain of 5.4%, surpassing the industry’s rise of 3.9%.
Royal Gold, Inc. RGLD acquires and manages precious metal streams, royalties, and similar interests. The stock has a Zacks Rank #2 and an estimated long-term earnings growth rate of 10%. For 2017, the Zacks Consensus Estimate has moved up 21% in the past 60 days and for 2018 the estimate has gone up 17%. The company has an average positive earnings surprise of 5.33% in the last four quarters. Since the start of the year, the stock has rallied 33.6%, surpassing the industry’s rise of 3.9%.
Based in Sandton, South Africa, Gold Fields Ltd. GFI is an unhedged, globally diversified producer of gold with eight operating mines in Australia, Ghana, Peru and South Africa. The company currently carries a Zacks Rank #2. The stock has an estimated long-term earnings growth rate of 12.36%. Year to date, the stock has surged 33.6%, surpassing the industry’s rise of 3.9%.
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